The pandemic reality hit India severely in March 2020 beginning with a few cases, which steadily moved up but remained well below a thousand daily cases till the first half of April. The markets had cracked with the Nifty50 index losing nearly 40 per cent by March 23 when the total number of cases was still below 500. By April 7, we touched 5,000 cases, but instead of falling further, Nifty50 gained 15 per cent. By the time we touched 50,000 cases on May 6, the index had gained 23 per cent from March 2020 low, and with cumulative cases of over 50 lakh on September 15, and clocking nearly 90,000 cases per day, we had gained over 50 per cent on the Nifty50 from the lows witnessed on March 23. Quite a dichotomy.
In March, post the historic crash, if one was asked to comment on a hypothetical scenario of India touching a lakh cases per day, any well-meaning analyst would have painted the most bearish scenario, possibly a systemic collapse with markets shutting down. Thus, the important lesson markets teach us is to ‘Expect the Unexpected’.
However, when we look back, we can find a logical reason for this move. We moved from a scenario of extreme fear, that of sure death due to Covid-19 to an assurance of high probability of survival. The stock market was among the few activities which were allowed to function despite the nationwide lockdown. This kept people engaged, entertained, and was profitable, thanks to the ‘beginners luck’ which played out well. The depositories clocked up over 50 lakh new accounts in the last six months and this brought in the much-needed liquidity to the markets. In the last few months, the liquidity has been feeding on itself, to create a virtuous cycle of markets gaining momentum – resulting in good profits for investors – renewed confidence – further liquidity being poured in. The ‘Robinhood’ investor had arrived.
Liquidity also has a habit of looking at the brighter side of any situation – a silver lining is enough to latch on. When the economy opened up June onwards, the month-on-month and year-on-year sales / operational numbers of companies/businesses brought cheer.
That said, the markets cannot move up without intermediate corrections. However, each of these corrections was seen as a buying opportunity; hence, minor corrections were followed by a spirited bounce back. Today, globally, the ‘Robinhood’ investors are considered a force to reckon with, due to their collective liquidity and well spread reach. But every such ‘force’ has a weak link which finally leads to its nemesis. Most of these investors have seen unprecedented profits since the time they invested with every additional rupee providing them higher returns with seemingly no risk to capital. We need to see how they behave when the markets correct sharply – whether they bring in fresh capital or they panic. I believe it could be the latter, as losing one's own money is always very painful.
In the last few weeks, even the nay-sayers were submitting to the gush of liquidity, the markets were poised for a further run as the earnings season was still three weeks away, and no other roadblocks were seen on the horizon. The news of a renewed lockdown in Europe due to fears of another wave of Covid-19 cases with the onset of winter seems to have caught everyone by surprise and tumbled the apple cart. Many other issues like rising Covid-19 numbers in India or the Indo-China border dispute were being brushed under the carpet. The Indian economy surely is not in a position to bear any further lockdown, even as analysts and economists are still grappling to understand how much we have already sunk.
Though stock markets are said to be the barometer of the economy, one needs to see the next few days whether it continues to be blinded by liquidity or slides due to panic. After all, it’s a game of psychology – Fear vs Greed.
Ambareesh Baliga is an independent market analyst. Views are his own.